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RBI Fails To Defend Rupee Again

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The RBI again fell short on defending the rupee again on Tuesday as it tumbled to an all-time low of 55.47 per dollar, before closing at 55.39/40, as per SBI closing rates, compared to its Monday close of 55.03/04 amid fears of slowing economic growth. Echoing the rupee fall, the BSE benchmark Sensex fell 62 points at midsession on fresh selling after gaining 152 points in early trade on Tuesday. The BSE 30-share index, which remained in the positive zone for the fourth straight session till late morning, fell back to trade below Monday's close - down 62.56 points to 16,120.70 at 1330 hrs. The 50-scrip National Stock Exchange index Nifty lost 18.35 points to 4,887.70, after touching the day's high of 4,956.35 in morning trade. The rupee hit a record low to the dollar for the fifth straight session on Tuesday, weighed down by large dollar demand from oil firms and weak global risk sentiment, especially after Fitch downgraded Japan's ratings. The falls came even after the Reserve Bank of India (RBI) announced on Monday measures to target arbitrage and speculation in futures and options markets, with traders saying this market segment was too small to have a big impact. The RBI has announced a string of measures to curb the rupee's falls, none of which has so far succeeded. It has also intervened aggressively earlier this month though it has been largely absent since Thursday. Although the rupee is now well below the key psychological level of 55 to the dollar, the RBI has refrained from intervening even as NDFs point to further falls. As the rupee breached the 55 level on Monday, the Reserve Bank had imposed restrictions of $100 million on "position limit" for forward contracts by banks. "The position limit for the trading member...bank in the exchanges for trading Currency Futures and Options shall be $100 million or 15 per cent of the outstanding open interest, whichever is lower," RBI said in a notification. It also advised the banks dealing in foreign currency to bring down their trading limits by June-end. The RBI notification said that the current Net Overnight Open Position Limit (NOOPL) of the authorised banks will not include the positions undertaken in the currency futures and options (F&O) segment in the forex market. It further added that the position in the F&O segment cannot be offset by undertaking positions in the over-the- counter market and vice-versa. RBI had earlier taken host of steps to arrest the fall of value of rupee which has been declining at a rapid pace. The currency has lost over 22 per cent in the last one year and about 11 per cent since March this year. The pressure increased especially since mid-March, when the foreign funds started withdrawing from the Indian stock market. The foreign institutional investors have pulled out Rs 1,109 crore in April and Rs 206 crore in May after pumping in net Rs 44,000 crore in January, February and March exerting pressure on the country's current account deficit. Erosion in rupee value has meant increasing cost of imports, including crude oil. But for correction in the crude oil prices in the global markets, the situation would have been precarious. Net overnight rupee open position limit for Indian banks shall not include positions taken in the Bringing A Knife To A Gun Fight Among traders the RBI's latest measures to target arbitrage and speculation is seen as akin to bringing a knife to a gunfight. The announcement had the same effect as its previous actions, which is to say not much. On Tuesday the rupee hit its latest record low against the dollar. "There was huge demand from oil firms. Later it turned into complete panic with the Japan downgrade, euro and pound falling and equities also turning negative," said Vikas Chittiprolu, a senior foreign exchange trader with state-run Andhra Bank. If anything, the RBI is signaling to markets the opposite of what it probably intends, according to traders: a central bank unwilling to be bold in defending the domestic currency. "This won't affect the market much," said Abhishek Goenka, CEO of consultancy firm India Forex Advisors, adding it was "overall a very poor signal to the overall market that RBI is unable to take bold steps in the current market scenario." The key problem behind Monday's measures, traders say, is that India's currency futures markets are not as liquid as spot or OTC forwards markets. Traders did see more of a potential impact from the RBI's announcement that positions taken in futures and options cannot be netted out or offset by taking positions in the OTC market, or vice-versa. Until the announcement, some dealers would bet in futures and options markets without an actual underlying position in the currency, and could offset these trades with the opposite position in the OTC market. However, this practice was not widespread, limiting the impact of the measures. "The arbitrage will be definitely be curbed, said Pramod Patil, a forex trader with United Overseas Bank, though he added the impact would be small. "I see INR weakening only, thats the broad theme," he added. However, analysts still left open the possibility of surprise measures, probably in the form of direct dollar sales to oil importers or some type of sovereign bond issuance, adding the RBI or the finance minister would need to adopt big measures to stop the rupee's falls. "Policy makers will need to take dramatic action soon if they want to stabilize the INR," Dariusz Kowalczyk, a strategist at Credit Agricole, wrote in a report. Kowalczyk added he the rupee could touch 57 to dollar ahead of the Greek elections in mid-June and cited "extreme" pessimism among the clients in India he had recently visited.